IT funding potholes

Organizations should know how to budget and pay for IT products and services -- they've been doing so for more than 50 years. This is not rocket science. Unfortunately, many organizations continue to make the same mistakes year after year.

Don't fall into these common funding potholes:

Refusing to pay a fair price. Some organizations are too cheap for their own good; they always take the low bid, even when it's so low that the bidder will struggle to deliver the promised services. While it often makes sense to accept the lowest price when purchasing paper, ink and other commodities, it rarely makes sense to nickel-and-dime the vendor that is implementing a critical new system. In most cases, the cost of a delay or downtime is larger than the amount saved by squeezing the vendor.

Pay a fair price for important IT products and services. Suppliers that offer superior service at a fair price, but not the lowest price, often offer a better value than suppliers that provide marginal service at the lower price.

Failing to plan for ongoing operating and support costs. The IT total cost of ownership model has been used for decades. IT leaders understand that there will be a cost to operate and support any new system or service. Despite our fervent desire, there is no such thing as a free lunch. Nevertheless, a significant number of organizations assume that new systems have no ongoing costs. They reason that unused capacity in an existing server and people who are already on staff are "free." Inevitably, they are surprised, and sometimes angered, when additional servers or staff are needed.

Don't pretend that ongoing costs don't exist or will be covered elsewhere. While ongoing costs may mean that a proposed new investment does not make sense, don't delude yourself and your organization by ignoring them. When the costs have to be paid, you will be in for a nasty surprise.

Signing contracts that scream, "Change orders ahead." Some vendors specialize in bids that are so low that at best they will break even. These vendors plan on making money by getting the customer to accept high-priced change orders. Contracts that don't specify deliverables or with poorly defined scope allow the vendor to argue that the requested service is not included in the contract. The customer usually agrees to the change order to avoid a project delay or to get the needed functionality.

Clearly define the scope of all services in all contracts. Don't agree to an incomplete description of deliverables that will allow hungry vendors to milk your budget dry.

Buying software without an implementation plan. Some organizations buy software before knowing where or when it will be implemented. Several years ago, executives in a multinational organization agreed that they needed to update systems supporting Finance, Budgeting, HR and Purchasing. Since the executive committee could not agree on how to proceed, the project team selected software and almost got the contract signed before any requirements were documented or the executive committee agreed on how to move forward.

In a more typical case, this happens when the buyer is negotiating for several modules within a suite or for licenses to cover a single business unit. The vendor offers "today and today only" bargain pricing for additional modules or business units. The project team assumes that it will be easy to get agreement to install the additional modules. While these new licenses are sometimes used, in many cases they are never implemented and become shelfware.

When buying software, be clear where and when every license will be used. If you take a limited time vendor offer for additional licenses, be sure to get support from the other executives. Without that agreement, if the additional licenses are not implemented, you may be held responsible for their cost.

Treating fully depreciated equipment as "free." Most fully depreciated equipment should be replaced; it has reached the end of its useful life, both in operational and accounting terms. Many departments resist periodic replacements, particularly when new equipment cost is the responsibility of the business unit but support costs are in the IT budget. A few years ago, a restaurant chain had very old, fully depreciated POS equipment that required a huge amount of IT maintenance time. Since Store Operations did not pay for IT support time, but did pay for new equipment depreciation, they resisted the upgrade. The POS system was only replaced after the CIO showed that upgrading would ultimately boost the bottom line.

Win the depreciation/replacement wars by demonstrating that lower support costs will pay for the new equipment.

Getting caught in political agendas. Executive compensation may be the root of budgeting problems. Some executives receive an annual bonus for spending less than their allocated budget. In order to maximize their bonus, these executives sometimes make the choice to incur lower short-term costs even though this will eventually result in higher long-term costs.

In other cases, bad budgeting decisions stem from a belief that expenses are always better in somebody else's budget. In addition to calculating the total return from an investment, be sure you understand the impact on every affected department's budget.

Budgeting is a complex and tricky balancing act plagued by a number of unpredictable events. Since organizations make these mistakes for different reasons, it is nearly impossible to account for them all. When faced with a budget pothole, try to determine if the other individuals don't recognize the pothole or if they have another agenda. Don't fall into these familiar IT funding potholes this year -- it's really expensive to climb out!

Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. Contact him at BartPerkins@LeveragePartners.com.

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